Is being Green Economically Viable for Indonesian Mining Finance Essay

ABSTRACT: Starting June 2009, Indonesia Stock Exchange in cooperation with environmental NGO, Yayasan KEHATI, formed a sustainability index named SRI-KEHATI. The Index is based on Sustainable and Responsible Investment’s standard of assessment. SRI-KEHATI enlisted only companies that being considered gave excellent performance both in stock market and sustainable development. Sustainable index itself has been recognized as a reliable benchmark for the Sustainable and Responsible Investment worldwide. However, SRI-KEHATI has brought up controversy as it enlisted three mining companies on its index; PT Aneka Tambang Tbk, PT Timah Tbk, and PT Bukit Asam Tbk. This research is questioned whether any economically viable for the mining companies could be gained in stock market by being enlisted on sustainability index.

This paper shall introduce the implementation sustainability index and up bring the examination of the benefits of being listed on the sustainability index vis a vis the market capitalization of the mining companies. The objective of the paper is to find any influence of the sustainability index to the mining companies’ position in stock market along with the increasing of the companies’ corporate social and environmental responsibility. Some economy tools will be used to examine the profitability of the three mining companies before and after being enlisted on SRI-KEHATI index. Interview with each company’s corporate secretary also being conducted in Indonesian language to extract the company’s own perspective on the issue itself. ABBREVIATIONS IMA Indonesian Mining Association UNPAD Universitas Padjajaran ISEAS Institute of South East Asian Studies MC Mining Code WB World Bank NGO Non-Governmental Organization CaIPERS California Public Employees Retirement System NYCERS New York City Employee Retirement System SRI Sustainable and Responsible Investment PRI Principles of Responsible Investment GRI Global Reporting Initiative CSR Corporate Social Responsibility CD Community Development ESG Environmental, Social and Corporate Governance SI Sustainable Investment RI Responsible Investment Eurosif European Sustainable Investment Forum USA United States of America UK United Kingdom HNWI High Net Worth Individuals IDX Indonesian Stock Exchange BAPEPAM-LK The Indonesia Capital Market and Financial Institution Supervisory Agency BAPEPAM former abbreviation of BAPEPAM-LK ANTAM PT Aneka Tambang, Tbk PTBA PT Bukit Asam, Tbk KEHATI The Indonesian Biodiversity Foundation NYSE New York Stock Exchange DJSI Dow Jones Sustainability Index ASX Australian Stock Exchange AuSII Australian SAM Sustainability Index DJIM World Index The Dow Jones Islamic Market World Index JSE Johannesburg Stock Exchange LSE London Stock Exchange FTSE Financial Times Stock Exchange Bovespa Brazilian Stock Exchange ASPI Advanced Sustainable Performance Indices TINS PT Timah Tbk GCG Good Corporate Governance JATAM Mining Advocacy Network WALHI The Indonesian Forum for Environment ASM Artisanal and Small-Scale Miners 1. INTRODUCTION In June 2009, The Indonesian Biodiversity Foundation (“KEHATI”) in cooperation with Indonesian Stock Exchange (“IDX”) officially launched SRI-KEHATI [1] . The index is enlisting 25 public-listed companies based on particular requirements [2] . All were chosen by KEHATI based on each company’s excellent performance on CSR, CD and environmental management in recent years [3] . By nature, KEHATI emphasizes more on the environmental management for evaluating the companies being enlisted on the index [4] . This is another reason why SRI-KEHATI is more widely-known as the ‘green index’ rather than sustainable index. As SRI has become a rising trend in investment in the last decades, enlisted in a Sustainability Index would enrich a public-listed company portfolio. Thus, this would lead to higher opportunities for the company to attract more investors with particular concerns on ESG factors and also provide supporting data to guarantee of minimum risk in long-term investment [5] . However, in practice, the economically viable of the index might not as expected if the Sustainability Index is being applied in countries with low environmental-concerns.

Although there have been increasing number of companies to go ‘green’, it is still doubtful to have accelerated profits after being recognized as green company in Indonesia [6] . In general, Indonesia has low concern on environmental dimension on development [7] . Moreover, the business sectors established within the country are mostly lack of awareness on environmental damage and its rehabilitation, whether they are domestic or even foreign-investment companies [8] . This would bring us to the following questions posed in this paper: (i) is being ‘green’ economically viable for the enlisted companies on sustainability index; (ii) are there any benefits gained other than direct profits for the company for being recognized as green company, and (iii) is the cost for ESG factors overcome the company’s long-term profits? The paper would focus only on three mining companies enlisted on the SRI-KEHATI per June 2009 and October 2009 in regard of the scope of the module. The problems would identify the concept of SRI and sustainability index.

Furthermore, the paper would examine the progression on stock prices being against facts based on interviews extracted from Corporate Secretary of ANTAM and Corporate Secretary of PT Timah, Tbk. Alongside statute approach as primary resources and bibliographic research as secondary resources. The last date of data collection is 26th January 2010. The paper concludes non-economical benefits achieved by the mining companies during the period of enlisted on SRI-KEHATI are larger than its direct profits gained on at the moment. Even though, profits in the stock market gained by the three mining companies after being enlisted on SRI-KEHATI were increasing too. This success example of being green companies should encourages other mining companies to establish better performance in ESG for better investment prospect. OVERVIEW OF SUSTAINABILITY INDEX IN INDONESIA Background of Sustainability Index in Relevance with SRI The concept of Sustainable and Responsible Investment (SRI) was first introduced as investment process based on social issues rather than to answers more largely concern and sustainable issues.

Therefore, the abbreviation was stands for Socially Responsible Investment in the beginning instead of Sustainable and Responsible Investment as recognized today. Socially Responsible Investment has infiltrated the business world since 1969 after some investors brought up resolution of ethical investment as the response of the uprising Dow Chemical’s case [9] . In 1984, CaIPERS issued investment guidelines that regard the social concern for investing more than 25% of the pension funds it holds [10] , followed by NYCERS. Since then socially responsible investment become influential in the global stock markets. Socially Responsible Investment has grown into more thematic investments along the changes on global concerns toward sustainability development. Traditional Socially Responsible Investment still preserved its existence to answer diverse concerns [11] , but new trend in investment is being introduced to address sustainability challenges. It is called as Sustainable Investment [12] (SI) or otherly known as Sustainable and Responsible Investment [13] (SRI). Eurosif defined SRI as any form of investment that integrated investor’s financial objectives with their concerns on environmental, social and governance (ESG) issues [14] . In Eurosif’s perspective, SRI covers ethical investments, SI, responsible investments (RI), ethical investments and any other investment process [15] that shares similar concerns for financial analysis and decision-making. But strong supporters of SRI like Pax World insisted there should be strong line between SRI’s definition and other mission-based investments [16] . SRI is about to affiliate assessment on ESG factors with relevant financial performances by incorporate both accurate financial and proper ESG analysis’s for investing in industry-wide best practices with sustainable business models [17] . SRI targeted on companies that implemented corporate sustainability business approach. They are attractive their business approach is aimed to enhance the shareholder values in long-term continuously while set high standard on their management [18] . Following the demand of reliable benchmark for SRI, several stock exchanges started to introduces Sustainability Index [19] . NYSE launched DJSI and DJIM World Index, LSE launching FTSE4Good, while European markets established The ASPI Eurozone [20] . JSE initiated JSE’s SRI Index [21] . Bovespa launched the Bovespa Corporate Sustainability Index [22] , ASX launched AuSII [23] , Japan launched Dow Jones Sustainability Japan 40Index [24] . SRI-KEHATI : Behind the Index SRI-KEHATI is constructed as a Sustainability Index, a reliable tool for SRI investors to examine the enlisted companies profitability supported by their environmental, social, and corporate governance (“ESG”) performance [25] . The index was designed to address demands on Sustainable and Responsible Investment (“SRI”) process [26] . Therefore, the abbreviation of SRI and KEHATI, as the most influential agency on the index’s assessment, are being used to name the newly introduced index in IDX. SRI-KEHATI index is published for public in 8th June 2009 and since then could be found in IDX 2nd Quarterly Report [27] and the following reports afterward. Since it first launch, SRI-KEHATI only enlisting twenty five companies. . KEHATI claimed they selected the enlisted companies with some levels of selections. To ensure objectivity and efficiency, KEHATI formed an Independent Committee which involved KEHATI stakeholders, IDX authorities, and independent representative [28] . On the early stage, The Committee would selects public-listed companies with minimum assets of one trillion rupiah (approximately 100 million USD) by using the financial data provided by IDX. The Committee then filtered the numbers by examines the companies’ commitment on GCG, CSR, human rights, and labour [29] . These fundamental criterions each have its own weight on the selection process.

The data is extracted from appraisal report issued by OWW Consulting for SRI-KEHATI’s purposes [30] . SRI-KEHATI will undergo two evaluation periods annually, October and April. METHODOLOGY Interview with Corporate Secretary of ANTAM and Corporate Secretary of TINS Two separate interviews were made with Corporate Secretary of mining companies respectively. Until the last day of data collection, questionnaires of interview were only being responded by ANTAM and TINS. Information was gathered from Bimo Budi Satriyo Corporate Secretary of ANTAM by electronic mail correspondence in Indonesian language on 22nd January 2010. While Information was gathered from Abrun Abubakar Corporate Secretary of TINS was taking by notes during live conversation by using international call to his personal number. The interview meant to extract their companies’ view and experiences being enlisted on SRI-KEHATI. Both respondents being questioned same issues, that being presented on the introduction section of this paper. Analyze based on Financial Data Second method of information analyze for this paper is by analyzing fluctuation of SRI-KEHATI index, fluctuation of ANTAM, TINS, and PTBA’s stock price right before being enlisted on SRI-KEHATI and after being enlisted on SRI-KEHATI. The data mainly used are provided by IDX Statistical 2nd Quarter 2009, IDX Statistical 3rd Quarter 2009, IDX Monthly Statistic November 2009, and IDX Monthly Statistic December 2009. The data is being compared with ANTAM 2nd Quarter 2009 Financial Report and ANTAM 3nd Quarter 2009 Financial Report also Sustainable Report 2008 issued by TINS. FINDINGS Controversy of Enlisting Mining Companies in SRI-KEHATI KEHATI aimed SRI-KEHATI to strengthen strategic alliances public participation on biodiversity and environmental protection [31] . Nonetheless, controversy still risen against the listing. It is because ANTAM, PTBA, and TINS remains on SRI-KEHATI in the first listing published on June 2009 and in the second listing on 29th October 2009 [32] , JATAM and WALHI are the most vocal against the listing. JATAM accused TINS is responsible for neglecting exhausted open-pit minings without proper reclamation in Bangka-Belitung province. JATAM also brings up the local conflict between ANTAM and ASM and other issued faced by PTBA. [33] Alongside JATAM, WALHI stated no reason should be accepted to enlist mining companies in ‘green index’ [34] . WALHI and JATAM both doubted SRI-KEHATI main objective as ESG campaign would not be effective as it would be simply used as the companies’ branding instead of improving the companies commitment on GCG and CSR [35] . Regarding this issue, Bimo Budi Satriyo Corporate Secretary of ANTAM answered, “A¢â‚¬A¦By being enlisted on SRI-KEHATI, ANTAM’s commitment towards CSR has recognized externally. This is shown the negative stigmatization on mining companies as main cause of environmental damage is inappropriate, at least for ANTAMA¢â‚¬A¦” [36] Economically Viable vs. Non-economically Benefits on Being ‘Green’ Findings extracted from interview with the respondents according to questions of economically viable for the enlisted companies on sustainability index were similar.

Abrun Abubakar Corporate Secretary of TINS stated, “..There are no significant changes, because stock price fluctuation is more influenced by the company’s performanceA¢â‚¬A¦” [37] While Bimo Budi Satriyo of ANTAM stated, “A¢â‚¬A¦Until now there is no empiric evidence in relevance between ANTAM enlisted in SRI-KEHATI with fluctuation of stock price or even the increase of volume trading in the stock exchangeA¢â‚¬A¦” [38] In contrast, there are some fluctuations after the three companies being enlisted on the index based on statistical analysis provided by IDX in Figure 1.1. The data is taken during the period of June 2009 to January 2010 on ANTAM’s stock price, PTBA’s stock price, and TINS’s stock price PTBA achieved the most accelerated increase in the stock exchange, while TINS reached higher price after a few month. ANTAM remains statics with some downwards movement in the end of 2009. In contrast with ANTAM 3rd Quarter 2009 Financial Report, where ANTAM stated its share price increased 19.5% during July-Sept 2009 [39] . Figure 1.1, IDX 2010. Based on IDX data, the companies’ performance in SRI-KEHATI is overall good by looking the progression of lines as shown in Figure 1.2; Figure 1.2, IDX 2010. Both respondents agreed the company has earned other benefits else in economical terms for being recognized as green company. Bimo Budi Satriyo stated, “A¢â‚¬A¦regarding the corporate image and reputation, the company is getting better respect from investors and shareholders. When we went for non-deal road show abroad, some potential investors were directly asked us questions on environmental management and community development. CSR has been an important issue for our shareholders and investors, even from abroadA¢â‚¬A¦” [40] His statements are relevant to ANTAM Financial Report which stated 45% of ANTAM’s top shareholders are foreign investors [41] . Abrun Abubakar viewed the issue further based on his statement, “A¢â‚¬A¦Some investors in the stock exchange with high environmental concerns are more attracted to companies enlisted in SRI-KEHATI…Companies’ performance is influenced by environmental management and community development. Therefore, if the company is excellent in managing the community development and the environment issue, it will reduce the investment risk into minimum. The investment become safer and sustainable for long-termA¢â‚¬A¦” [42] In the issue of the cost for ESG factors could overcome the company’s long-term profits; both respondents were stating it would not but with different arguments.

Abrun Abubakar stated, “..No, it is not. It is not a problem for us after all as it has been stipulated in Article 76 of Mining Code that every company is obliged to perform CSRA¢â‚¬A¦” [43] Based on TINS’s Sustainability Report 2008 [44] the company allocated Rp 5.9 billion in 2008 for CSR, as shown in Figure 1.3. A reduction from 2007’s allocation but still higher than other previous years. Figure 1.3, TINS 2008 – Realization of Partnership Programme Fund 2003-2008 Based on ANTAM Sustainability Report 2008, the company spent nearly 5 % from the 2007 company’s net profit to provide funds for their CSR programme [45] . It was approximately Rp 244.3 billion. Bimo Budi Satriyo gave more comprehensive explanation regarding the issue, as follows; “We felt the cost we spent to support CSR, environmental management, and community developments are still much lower compared with long-term profits gained by the company. ANTAM understands environmental management and community development are part of the business risk that needs to be carefully managed.

Took active participation community development as good corporate citizen would reduce any disturbances to the company’s operation. Risks of failures on environmental management could make the company suffers great loss while we have to spend high cost on its mitigation. That is why we are not focusing merely on profit gains, but also the business sustainability and developmentA¢â‚¬A¦” [46] CONCLUSION The emphasize of SRI is lying on the optimization of using the ESG material for investment analysis and decision-making process in a particular form of investment that would lead to sustainability development, not just as for responding on social concerns at present. In SRI, investors could be assured the investment would be managed under disciplined management with less resistance from stakeholders in the community regarding the by-products of the investment itself. Such as, environmental damages, local conflicts, and other social concerns. Sustainability Index is then created to provide reliable and investable benchmark for SRI. Whereas there is neither rigid standard of making the index ever structured, most Sustainable Index is designed to be independent and providing rational, investable benchmark a basis for funds and derivatives that being focused on sustainability companies. The research conclude that for mining companies being recognized as ‘green’ companies is economically viable based on the progression of the stock price.

However, both companies that being observed disagree the analyse as they felt the new condition is not significant enough be claimed has boosted their profitability along the listing period. Other factors have to be observed to examine the company profitability after being enlisted in a sustainability index. However, both companies agree they have gained other benefits exclude direct profits for being a progressive company in CSR and CD respectively. More investors get attracted to invest, the shareholder’s interest become maintained in better and sustainable manner, cost-efficiency for mitigation, and business life-span could be prolong without disturbance from local community and environmental factors. Profitability could be gained as expected as long the operation is working according to business plan with minimum risk during the process. In this case, the economically viable of being a ‘green company’ is by expanding the company target into more sustainable development in bigger scope. Rather than short-term profit gain and secluded the development only within the company’s body itself. Therefore, being a company that reach SRI’s standard is actually provide long-term profit and benefit for the business. Lastly, the research has found CSR programme budget for both companies that being observed are vary annually.

Companies use review and budget estimation to reach the CSR, CD and environmental management targets without over-spending. Though the budget is taken from the company’s last net profit instead came from long-term saving, conclusion of the relation between CSR cost and long-term profit could be taken from these data. As every year the company save around 5% or less for funding the CSR programme, it means in long-term the company has sure it would not absorbed most on their profit. Therefore providing cost for CSR, CD and environmental management is not a burden for mining company expenditure. LIST OF TABLES LIST OF FIGURES BIBLIOGRAPHY

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